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Christine St Anne: Morningstar's latest managed funds survey found that fund managers ended 2012 with some healthy returns. To give us an insight into how well these funds performed, I'm joined by Morningstar's Julian Robertson. Julian, welcome.
Julian Robertson: Thank you.
St Anne: Julian, what managed funds did well in the last quarter of 2012?
Robertson: Well, it was fairly broad brush success for a lot of managed futures and the market was pretty strong so they all (wrote the coattails) of the increase in share markets around the world and domestically. One that probably sticks out the most is the value type managers. And the sectors that did particularly well were things like financials and consumer discretionary and that's a typical hunting ground for the value type managers, and that was common to both Australia and overseas or global investment managers too.
St Anne: Was the good performance a reflection of manager skill or the conditions of the market?
Robertson: Well, it's a combination of both, I guess. A lot of the managers, obviously, are positioned for the uptick in the economy in the market and those managers who added more sensitive buyers to their portfolios tended to do better and that's reflected in the outcome of the value managers, for example. So, it depends on their style and where they were positioned, with a bit of stock selection and a bit of fair wind from the market too.
St Anne: Julian, were there any funds or sectors that lagged?
Robertson: Well, one of the main areas where there was a marginal underperformance was actually in AREITs (Australian real estate investment trusts), it was only very small, but that's obviously after a very strong rise in that particular sector of the market. So, you could say they had a slightly disappointing quarter but they still delivered round about 7 per cent, and it's a notoriously difficult market to outperform any way because of the narrowness of the stocks within the universe.
St Anne: Julian, given the broad range of managers that did well, could we see a return of the market in 2013?
Robertson: Well, it's a difficult question because you are sort of looking at the future here. But certainly there is a few commentators who are of the opinion that the back drops got a lot better, and a few things have been resolved or there is a little less uncertainty regarding the fiscal cliff, for example, in the U.S. and the Chinese data has been little stronger or a little bit more upbeat. But then a lot of that's reflected already in the market with the recent rise. So, there is sort of concern about the valuations of the market at the moment and so net-net it might be difficult for the market to shoot ahead from here, but as always it's always with hindsight that these things are much easier to foretell.
St Anne: Julian, thanks so much for your insights today.
Robertson: Thanks very much, Christine.
23/04/2014 Morningstar's Peter Warnes remains comfortable with his market forecast but still expects volatility to remain a constant companion. Keeping bullish amid volatility Nicholas Grove 23/04/2014 http://video.morningstar.com/aus/video/140411_warnes_audio.mp4
Nicholas Grove: I'm Nick Grove at the Morningstar SMSF conference for 2014. I'm joined by Morningstar head of equities research, Peter Warnes. Peter, just generally speaking, where do you see the economy and the market heading as we close out the 2014 financial year?
Peter Warnes: Nick, I'm still relatively comfortable, albeit, not extremely bullish, but I'm comfortable the economy is gaining some traction - we are rebalancing slowly. We will be below trend for a little while. But having said that, I think that you're going to get an economy on the improve if it suddenly gains some traction.
From the market's point of view, again the market is trying to tell you that that's what's happening and they are comfortable with it. Having said that, volatility is still going to be a constant companion, but I think volatility around a gradually a rising trend is what we're looking at. I'm still quite comfortable with our forecast of the ASX 200 being closer to 6000 by the end of the year than where it is today.
Grove: You say, you are not terribly bullish on a lot of things, but are there any particular sectors you are a little bit bullish on?
Warnes: Well, Nick, I'd say the demographic is still that the demand curve for healthcare is going to continue to increase and increase substantially. That ageing demographic is also obviously positive for things in the retirement space, so healthcare and the retirement space is interesting.
As this economy starts improving, banks are still the bankers to the economy and as that gains traction then banks are going to do better - their cost-to-income ratios will improve. And they've put a lot of money into IT and technology - those benefits are yet to come through. And while the bad debts are now at probably a cycle low, I don't think all of a sudden they are going get blown out of the water either.
Grove: Pete, thanks very much for your time today.
Warnes: Thanks, Nick.
Grove: I'm Nick Grove at the Morningstar SMSF conference in 2014./video/transcript/2399 mailto: ?subject=Keeping bullish amid volatility&body=http://www.morningstar.com.au/video/story/2399 Increasing income from property
16/04/2014 While they may not be front of mind for many investors, there are smaller Australian property players that can provide both a quality asset and a high yield. Increasing income from property Nicholas Grove 16/04/2014 http://video.morningstar.com/aus/video/140411_morrisey_audio.mp4
Nicholas Grove: I'm Nick Grove at the Morningstar SMSF Strategy Day in Sydney and I am joined by APN Property Group's Pete Morrissey. Pete you and your team tend to ignore index weights. Can you briefly explain why it is you do this?
Pete Morrissey: One of the key things for us obviously is income. And a lot of the large-cap index players, such as Westfield, they have a lower level of income than what we would like to see. Another thing is that some of them - again The Westfield Group as an example or Goodman - they have a lot of offshore exposure, while our fund is primarily focused on domestic and achieving a domestic rent. So we are willing to take bids away from those types of names because they are lower income and get better income ahead of domestic-focused managers that may not be at front of mind for many investors but can provide high yield and offer the quality of asset that we are after.
Grove: And where are you seeing a bit of value at the moment in the Australian listed property space?
Morrissey: Well for a long time I think now the industrial sector for the last two or three years, probably even post-GFC, has looked increasingly good. It's hard to get an exposure there - there are only a few names. The development tap was turned off immediately after the GFC and not a lot has been done since. There is strong demand obviously - the evolution of online shopping and those sorts of things, these warehouses are required. So it's really important and there is some good value there for sure.
Retail again - that's had a tough time since the GFC and there is some value in some of the less obvious names that we invest in, away from the ones that are front of mind like the likes of Westfield.
Grove: Pete thanks very much for your time today.
Morrissey: Okay. Thank you, Nick.
Grove: I'm Nick Grove at the Morningstar SMSF Strategy Day in Sydney./video/transcript/2398 mailto: ?subject=Increasing income from property&body=http://www.morningstar.com.au/video/story/2398 Why moats matter
04/04/2014 An economic moat provides a gauge of a company's competitive advantages and overall strength, and it is a highly valuable tool for investors of all levels. Why moats matter Morningstar US 04/04/2014 http://video.morningstar.com/aus/video/
No transcript is available for this video./video/transcript/2396 mailto: ?subject=Why moats matter&body=http://www.morningstar.com.au/video/story/2396 Getting SMSF ready for SuperStream
03/04/2014 SMSF members who accept employer contributions will need to prepare for the government's new measure called SuperStream. Getting SMSF ready for SuperStream Christine St Anne 03/04/2014 http://video.morningstar.com/aus/video/140327_superstream_audio.mp4
Christine St Anne: The government has introduced a new measure called SuperStream designed to modernize superannuation. To talk about the implications for SMSFs, I'm joined by SuperGuardian's, Olivia Long. Olivia, welcome.
Olivia Long: Hi.
St Anne: Olivia first of all, can you tell us a little bit more about SuperStream?
Long: SuperStream is a set of measures that came out of the Cooper Review 2010. Essentially it's the government's way of bringing the superannuation back office into the 21st century. So some of the key features include an increased use of technology, uniform data standards, the use of an tax file number as a key identifier and a straight through processing of superannuation transactions.
St Anne: So Olivia the measures apply to SMSF members who accept employer contributions. So what do they need to do?
Long: So essentially for the past few years our providers have been upgrading a software. So that they can accept electronic superannuation messages, but it's not quite so simple for SMSF. So I consider it this way, if the employers are sending out superannuation payment information electronically, there needs to be some form on behalf of the SMSF to collect that information and pass it on to the members. So it's quite straight forward where they're using an SMSF accountant or administrator, because our software and I was asked to do that on their behalf, but for those that aren't they need to consider appointing some form of intermediary to act as electronic server address and collect that information for them.
St Anne: Olivia, so what are the key dates to be aware of?
Long: Okay. So by the 31 of May most SMSF members need to notify their employers of the electronic servers address and their banking information. By the first of July all employers with more than 20 employees need to implement the new electronic process. From 1 July 2015 those employers that have less than 20 employees need to implement as well. So there are two key dates there depending on the size of the organization you work for.
St Anne: Finally, Olivia I'm sensing involvement from the ATO, any tips for SMSF members?
Long: Absolutely, recently the ATO have written to a number of SMSF members to let them know what their obligations are, and what the key dates are. The ATO have significant amount of information available on their website to assist trustees with understanding what their obligations are, but also at least in the panel of providers who can help them and that is the – as the intermediary.
St Anne: Olivia thanks again for your insights.
Long: My pleasure.
27/03/2014 SMSF trustees face new audit requirements from the Australian Taxation Office Is your SMSF audit ready? Christine St Anne 27/03/2014 http://video.morningstar.com/aus/video/140325_audit_audio.mp4
Christine St Anne: I'm at the BT Financial Group's office and I just spoke to Bryan Ashenden, who will be speaking at an upcoming SMSF Trustee Day. He talks to us about the new audit requirements for trustees.
What is the deadline for selecting an auditor?
Bryan Ashenden: There is one true dead line, which is talking about at least 45 days before you do lodge your reports for that fund for the year. I think what's probably more important is not just think about that as the deadline. I think as you talk about how you run an operator fund throughout the year, there may be times depending on, what is that you are looking to do? You want seek some guidance or some support. And so having your auditor in place beforehand can actually assist you in that. So you can talk to them about this is what we are looking to do. Did I see any issues? Did I see any concerns with it? So you can address those things upfront rather waiting for them to provide an opinion at the end of the day.
What do trustees need to look for when choosing an auditor?
There is now requirement essentially from the 1st of July this year that the auditor needs to be an approved auditor. So, that's really the first thing that people will need to look for. And what that means from an auditor's perspective is that they have registered themselves with the regulator, which is ASIC in this situation.
You're also probably looking to see, what sort of qualifications do they have? For examples, have they completed a specialist qualification around auditing in self-managed superannuation funds? Are they a member of a professional body? And some of the really simple questions like, how many other funds do they audit? Is it someone that is very, very experienced in this space? Or is it someone that might audit five funds a year and then perhaps he isn't as on top of the issues, as a really experienced auditor might be.
What information do they need to provide?
So the auditor's requirement here really is, they need to sign off on a couple of things. So, as a minimum, funds are required to produce an operating statement and effectively a statement of the financial position, so what are the assets, the liabilities and so on. So that's the minimum sort of things that would be provided. And it's not that the trustees themselves will gather and collate all of that information, that's using an administrator, is often where they can come into a system, making sure that all those documents are prepared correctly and they have been handed over the auditor.
But it's also that showing from the auditor's perspective, have the trustees done all the things that they need to throughout the year. So things such as do they have minutes in place, to show that they have considered their investment strategy, that they have considered insurance, which is an important requirement these days of investment strategy. So, evidence that they are complying with the legal requirements as a trustee and their duties throughout the year, because an auditor needs to provide an opinion on that as to whether they believe the fund has met its obligations or has potentially breached some obligation.
What is an SMSF auditor number?
A self-managed super fund's auditor number. What this really is now is, actually it's the proof that the person who does the audit of the fund has appropriately registered with the regulator. So that they are showing they have got the relevant experience, the relevant qualifications and accreditation to do these sort of work and it's really, really important. This is part of this new requirement that came in from the July 1, 2013 and where it becomes really important is that number actually gets filled in on the fund's tax return when it gets lodged with the ATO. So if a fund lodges its tax return and doesn't have their audit number in there, essentially again the trustees aren't meeting their obligations. So it's – we feel like it's the identifier to say that, yes, we have an appropriate person who is auditing the fund.
Would your auditor be accountable for any breaches?
It's a really good question. Of course, we never want any breaches to happen and getting the right experience and having the right people support you throughout the process, should may – that that doesn't happen and that's going to be, whether it's with the administrator with the financial planner or a lawyer, depending on really what trustees are looking at.
In terms of those sorts of breaches, there are certain responsibilities on auditors if they hold themselves out as having this appropriate qualification and they don't, they can get penalized, but that's more of an administrative penalty coming direct from the ATO, saying where the auditor hasn't done the wrong thing.
Where you are probably looking from a trustee perspective, again is, trustees themselves assume a lot of responsibilities and as much as I can contract with someone like an auditor, an accountant, a financial planner to assist them through the process, trustees generally still retain the full responsibility. If however you get to a situation where an auditor perhaps should have picked something up and hasn't and therefore hasn't reported it, or brought it to the attention of the trustees that's probably the question about do the trustees have any rights against the auditors themselves and there is nothing in the legislation that really backs that up.
/video/transcript/2394 mailto: ?subject=Is your SMSF audit ready? &body=http://www.morningstar.com.au/video/story/2394 Key rulings for SMSFs
20/03/2014 AMP's Peter Burgess outlines key legislative considerations for trustees Key rulings for SMSFs Christine St Anne 20/03/2014 http://video.morningstar.com/aus/video/140225_rulings_audio.mp4
Christine St Anne: We're at the SMSFs Professionals' Association or SPAA National Conference, and today I'm joined by AMP's Peter Burgess, who was recently called the superman of SMSFs. Peter, lovely to see you.
Peter Burgess: Thank you, Christine. Thank you for having me.
St Anne: Now, Peter, your topic was on key legislation in SMSFs. So, we could begin by asking, you'd mentioned that 2013 was a rollercoaster year in terms of legislation. So, what part of the legislation did the new government end up keeping?
Burgess: Yes. Well, it really was a rollercoaster ride in my view for self-managed super fund trust deeds. We started the year with a number of changes which were slated to come into effect from 1 July, 2013. Many of those changes didn't eventuate, and during the course of 2013 we also had a number of announcements, many of those didn't eventuate either. So, by the end of the year we were pretty much back to where we started from.
So, what we know as a result of the consultation phase that the government has been through, we now know the measures that they are looking to proceed with. So, these are measures previously announced by the government; the previous government, so we have some certainty now as to which measures are proceeding.
So, new penalties, for example, for trustees, is one of the measures which we know that the government is keen to proceed with. So, we were expecting that measure to be introduced in the parliament very soon for this to start from 1 July, 2014.
St Anne: And on that area of the new penalties for the – and to the ATO, so what does that mean exactly, because you'd mentioned that that could be meaning that SMSFs could look for a new corporate trustee. So, I just wanted to know if you could explain that a little further, Peter.
Burgess: Yeah, so assuming they put in the measures the same as what was previously introduced in the parliament last year, because they did introduce a bill to give effect to the stopped penalties from 1 July, 2013, but that lapsed with the calling of the election. So, they're going to need to reintroduce this measure. So, assuming it is the same as what they did last year, what that will mean is three additional powers that the ATO will have to take action against trustees who breach the rule.
So, a direction – a rectification direction, so they'll be able to direct the trustees to actually rectify the breach, a power they don't currently have, and education direction is where they can direct the trustees to undertake some education; and finally, a sliding scale of administration penalties. So, the ATO will have the ability to impose penalties which are more appropriate to the severity of the breach.
So, in relation to corporate trustees, individual trustees, what's interesting is the way those administration penalties will be levied. If you have a corporate trustee, for example, and you file to produce financial statements, then the penalty for that is $1,700, but it's levied at the corporate trustee, once on the corporate trustee. If you have individual trustees, each individual trustee will incur a $1,700 penalty.
So, if we ever needed another reason to have a corporate trustee, I think there's another one in terms of the way these penalties will work.
St Anne: Now, on the very topic or area of excess contributions that there's more changes in there and you'd mentioned in your speech about comparing the new and the old, so what exactly is now the new requirement?
Burgess: Yes. Well, in 2013 there was a number of changes enacted to the tax treatment of excess concessional contribution. So, that's changed. So – and these are – a lot of these changes are effective 1 July, 2013. So, when it comes to excess concessional contributions, they are now added to your assessable income and taxed at your marginal rates. Under the old system, it used to be a 31.5 per cent tax rate. We don't have that anymore.
So, it really went – when we talk about concessional contributions, there is no such thing as excess contributions tax anymore because the excess is just automatically added to your assessable income.
So, that was quite a significant change and a good change, because for people on low to middle incomes, under the old system they were paying effective rate of 46.5 per cent tax on their excess concessional contributions, and in many cases, it was an inadvertent mistake. So, the new system is certainly a lot fairer in that respect, yeah.
St Anne: Now, Peter, can you give us an example – and I've to refer to my notes here – on the latest on excess non-concessional contributions?
Burgess: Yes, yes, yes. Okay, excess non-concessional contributions, I guess the big news here – and the coalition has been very public about their desire to address the disproportionate penalties that apply to excess non-concessional contributions. So, severe rates of excess contributions tax applying to these excess non-concessional contributions. In many cases, it's an inadvertent mistake. We know the Commissioner has a very narrow interpretation or definitely, the legislation has a very narrow interpretation of what constitutes special circumstances.
So, the coalition is very keen to address that. So, we're not sure how they'll do that, but what was interesting is, last year, in February last year, whilst in opposition, the coalition did try to amend the rules around Commissioner discretion to give the Commissioner greater powers of discretion. And they also – and that was intended to cover inadvertent mistakes. So, where the client acted on advised by the advisor or the fund just made the contribution the wrong use, those type of things would constitute an inadvertent mistake and the Commissioner would be able to exercise discretion in those cases.
So, they tried to amend the rules last year. So, is that an insight as to what we can expect this year? Is this the way the coalition is intending on fixing this problem? If they are, we would work on that. My only concern is that it might result in a significant increase in the number of discretion cases coming before the Commissioner which may clog up the system.
So, I guess as an alternative to that, perhaps we could think about refunding excess non-concessional contributions in a similar way that we now do it for concessional contributions. Personally, in my view, I think it's inevitable that we will get there at some point.
St Anne: And finally, Peter, of course, property has been a big issue with SMSFs and we had minister Arthur Sinodinos touch upon that. So, is that going to be something that the government and SPAA will be focusing on?
Burgess: Yeah, look, I think what we heard from the minister today was also consistent with what I've been hearing from Treasury and that there is no intention to review these arrangements at the moment. So, the two-year review which has been much anticipated but now long overdue doesn't appear to be occurring. The Treasury haven't been instructed to commence their review. I think what's more likely given that we've got the financial sector review now that any type of review of these arrangements will be incorporated as part of that review. We heard from the minister today there is no intentions to do a standalone review of these arrangements. It will be incorporated into this sector review as will the licensing of these arrangements. And we think that's important that we do get this sorted out. We actually encourage a review of these arrangements to address the licensing issues and so forth.
St Anne: Well, Peter, looks like certainly 2014 another rollercoaster year. Thanks for giving us the insight to rather complex part of SMSFs. Thank you, Peter.
Burgess: Thank you, Christine.
St Anne: Thank you.
17/03/2014 -- Do trustees know best? Christine St Anne 17/03/2014 http://video.morningstar.com/aus/video/140225_trustees1_audio.mp4
Christine St Anne: We are at the SMSF Professionals' Association or SPAA National Conference, and today I'm joined by Graeme Colley to give us an insight on whether SMSF trustees know best. Graeme, welcome.
Graeme Colley: Thank you, Christine.
St Anne: Now, Graeme, you presented on a particular survey with Russell Investments. Can you tell us a little bit about the survey? It was about getting intimate with SMSF trustees.
Colley: Well, this is the first survey that we've done with Russell, and this time we've interviewed about 1,400 trustees; of which 800 didn't have self-managed superannuation funds and then we interviewed about 400 advisors. So that gave us a good idea of their perceptions of each other, and where they're positioned in the market at the time.
St Anne: Now, in terms of SMSF trustee perceptions, in terms of their approach to investment markets, how did they approach the various asset classes out? Say for example, in terms of Australian equities, they produced a good return. Is the wall of cash moving from SMSFs into this asset class?
Colley: What we have seen with that, is that of the trustees of self-managed superannuation funds that 42 per cent of them go for professional advice, and we've seen that they've got more diversified investment portfolios, which include shares and things like that. We have seen some movement out of cash, but not to the extent that we expected. I think the main reason for that is that people are still fairly conservative in the current climate.
St Anne: And in terms of international equities, that was also an asset class that produced good returns, of course, not any SMSF trustees, but Australian investors in general maintain a home bias. Are you seeing maybe that sort of change as well?
Colley: Well it's changing from the point of view that they are looking at ETFs as an investment class. They are also looking at what they see as a diversified company. Say BHP for example, which has got investments overseas and they signed that in those circumstances. That's really international diversification, which truly isn't because sometimes those companies specialize in particular markets. So it's a little bit of – we are not looking broad enough, I think from the investment class itself and that's what they really need to do.
St Anne: So I suppose does that answer the question whether SMSF trustees know best? I mean do they really need some kind of advice to help them with their investment strategy?
Colley: Well with the investment strategy, it appears to us that the problem is that they're not looking broadly enough at the investment classes themselves. The diversification seems to come through the obtaining of professional advice. So that is not an indicator by itself, but it's certainly an important consideration. So, if they're not going to go for professional investment and advice, then I think they need to look at learning a little bit about that investments and how you diversify your portfolio.
St Anne: And Graeme can you give us an insight into how SMSF trustees interacted with advisors? I know that the Minister Arthur Sinodinis, early this morning said that he resonated with the philosophy of do-it-yourself of more individual approach. Is there a need or recognition that maybe advisors need in this area?
Colley: What we are saying, we have got three classes of mom and dad trustees. We have got what we call the controller, we got let's call it the coach seeker and the outsourcer. And what we see from the research that we have done with Russell is that the controller, they are people that really do it themselves. They are starting to look around for advice, and they're sort of putting their toe in the water I suppose.
Now the coach seeker, are people that use advisors and they learn from that and I think they're the best sort of client to have. And then the outsourcers are people that just hand it over and just hope for the best that they have got the right advice.
St Anne: Graeme. Thank you so much for your insights today and nice to see you again.
Colley: Thank you, Christine.
/video/transcript/2392 mailto: ?subject=Do trustees know best?&body=http://www.morningstar.com.au/video/story/2392 Getting ready for contribution cap rises
13/03/2014 The indexation of the contribution caps will give people the opportunity to put more into superannuation. Getting ready for contribution cap rises Christine St Anne 13/03/2014 http://video.morningstar.com/aus/video/140312_caps_audio.mp4
Christine St Anne: The fiscal 2015 year will finally see increases to contribution caps into super. Today I'm joined by SPAA's Graeme Colley to talk about the changes. Graeme, lovely to see you, again.
Graeme Colley: Well, thanks, Christine.
St Anne: Graeme, so what are the big changes?
Colley: Well, the changes when you are talking about contributions are from the 1st of July this year and we're seeing an indexation in the $25,000 cap and that's the concessional contributions cap to $30,000 and that's part of the normal indexation in $5,000 lots. And from that we're seeing an increase in the non-concessional contributions cap as well and that goes up to $540,000.
St Anne: Graeme, so how can trustees take advantage of those rises?
Colley: Well, it's not the trustees, it's the employers making contributions to the superannuation funds by making sure that they – if they want to maximize their contributions, not only with the concessional contribution cap going to $35,000 normally for everybody. But for those who are 50 and older, we are now seeing an increase to $35,000 for their contribution cap. So I've now got two concessional contribution caps for any people who contribute to super. On top of that, if I want to make non-concessional contributions, that's a move from $450,000 to $540,000, if you can access the bring forward rules.
St Anne: So how did the new concessional contribution cap rises impact the non-concessional cap rises?
Colley: The link between the concessional and the non-concessional contribution cap is that the non-concessional contribution cap is equal to 6 times the concessional contribution cap. So when you are looking at that being $30,000, it means that we're now moving to 6 times that, which is $180,000 for the year-by-year non-concessional contributions cap.
St Anne: Finally Graeme, any traps to avoid?
Colley: There are some traps in it. That is for people who are salary sacrificing. They need to review this salary sacrifice arrangements, because they might have that. Now say that the maximum concessional contribution cap of $25,000 or another cap that they might have there. So making sure that that gets in close to $30,000 from the 1st of July, if they wanted to maximize their salary sacrifice. For those that are between age 50 and 60, making sure that they maximum salary sacrifice and that can go up to $35,000.
So that's very important, because what we've seen in the past, is that people when the contribution caps have changed either up or down, people have missed out on the opportunity or in some cases where the contribution caps have gone down they've been caught by excess concessional contributions tax. So that's really important there.
The other thing is that, when you are triggering the bring-forward rule for non-concessional contribution caps, the trap there is that, if you've already triggered it in the last two years, that's fixed for the next three years. So that, if I've triggered that say in this financial year, then for the next two financial years my non-concessional contribution cap remains at $450,000. But if I wait until the 1st of July and trigger it, it then goes up to $540,000 for the next three years.
So you really need to be careful of those two things. First is salary sacrifice, and secondly, is the impact of the non-concessional contribution cap.
St Anne: Graeme, lovely to see you again.
Colley: Thanks, Christine.
Graeme Colley will be speaking at the fifth annual Morningstar SMSF Trustee Strategy Day. The event will provide practical strategies for avoiding common traps in managing your SMSF. Register now for this fully catered event by simply visiting the Morningstar website./video/transcript/2391 mailto: ?subject=Getting ready for contribution cap rises&body=http://www.morningstar.com.au/video/story/2391 Stellar returns for the long term
06/03/2014 Perpetual chief executive Geoff Lloyd talks about the competitive advantage behind the company's unrivalled performance and the transformation of the business. Stellar returns for the long term Christine St Anne 06/03/2014 http://video.morningstar.com/aus/video/140304_perpetual1_audio.mp4
Christine St Anne: Perpetual Investments was recently awarded Morningstar's Australian Fund Manager of the Year. It comes after some recent stellar half year results. Today, I'm joined by Perpetual's Chief Executive, Geoff Lloyd to look at some of the highlights and challenges for the business. Geoff, welcome.
Geoff Lloyd: Thank you. Thank you for your time today.
St Anne: Geoff, firstly congratulations on your reward. Now the strength of the equity market is a key driver behind your business. How do you steer Perpetual through volatility and how do you capitalize on the good times?
Lloyd: Right, I think in Perpetual Investments, it's actually about performing throughout cycles and Perpetual as a deep value active manager has outperformed many cycles and we've worked really hard, the quality of our asset management team and the leadership there under Matt is second to none. It also has within Perpetual Investments, equities, income and multi-sector, and so our funds are sort of two-thirds, one-third there and that brings a lot to our process, brings a lot to our brand and what we stand for, but it does help us perform throughout cycles, but look it all comes down to the quality of our people, and the process that's been embedded as part of Perpetual's culture through all leadership and then that's something we're very honored to have been recognized by Morningstar. It's something that the team don't go out to achieve, but particularly winning Fund Manager of the Year two years in a row is a great honor for Perpetual, something we're very humbled by, but ultimately we're most proud that we've been delivering great returns for retirees now for many decades and that's just hard work.
St Anne: Geoff, on the point of a quality investment team, you've had some high profile departures. How do you manage key person risk?
Lloyd: Well, Perpetual's managed that key person risk over 20 years, I think, more than any other business that I can think of in Australia and so, it's always been about the team and every one of those departures have said that before they left, they said that, when they're leaving and they've said that since and they like the current leadership, particularly in equities under Matt. We're very proud of the team that they're building. The depth and breadth of our team at Perpetual is the best it's been for over a decade. The talent in there, their commitment to the client and to each other, it's quite a competitive environment. There's no doubt and it's a collaborative environment as well and they have a little fun. They do that though, starting at 7.00, they're the first team in this building and they're the last to leave and they're focused on delivering those returns consistently. It's not just peaks and troughs of performance. This is a team like no other. It's unrivalled to have consistently delivered over our flagship funds of one, three, five, seven and 10 years.
St Anne: Your recent half year result highlighted the success of the transformation project. Geoff, what were the challenges of bringing the cost efficiencies to the business?
Lloyd: Well, the program's about fixing Perpetual and growing it. So, it's a lot more than just cost-out. Actually, it was about transforming our business, which is something you have to do. Change is something that happens to you and we chose the path of significant change which meant transformation and that meant that we needed a great strategy, we needed courage to execute it, we needed to make sure that we had clarity of what we'd be and what we wouldn't be and what we do, what we wouldn't do and have conviction through that.
Now, 18 months on, that hard work has really started to deliver even more results for our shareholders and for our staff, but it's about clarity and control and we set that path, we had that conviction and the people at Perpetual rallied around that change. They helped drive that change. Unfortunately it meant, we did lose a lot of staff, but we got back to the core of Perpetual and what made it great and that's something that people were equally excited about and wanted to see happen.
St Anne: We of course have a growing compulsory super system. Geoff, what are the competitive advantages of a business like Perpetual and what are you doing to reinvest in them?
Lloyd: Well, unrivalled performance is our competitive advantage in Perpetual Investments, and that's about our people and our process, and so, at the moment, we're investing in different talent programs, high performance and measurement around high performance, the accountability for all that, reward and recognition, all those things are sort of easily said. It's about getting even better at them.
St Anne: So Geoff, are you looking at expanding that unrivalled performance to include other funds perhaps in the global equities area?
Lloyd: Well, we've certainly been expanding our product set, as I said, over – for the last 5 to 10 years, Perpetual is no longer just an Aussie equities manager, a third of our funds under management are in income in multi-sector assets. Within equities, we've continued to expand what we call extensions from the core industrial strategy. So, the last half, we've launched a Pure Value Micro Fund and that's been really important to showing continued growth there. These are concentrated conviction strategies with higher margin and performance fees attached to them.
Prior to that, we've launched a Pure Equity Alpha Fund, a Long-Short Fund and so we've got a good track record now of five plus funds, plus our Diversified Income Fund. So, at a time when Australians are looking for more income, less growth as their life stages change, our Diversified Income Fund with five plus years is really now starting to have traction in the marketplace.
St Anne: Finally Geoff, as a relatively newish CEO, how are you enjoying the role?
Lloyd: Well, look I joined Perpetual for the growth opportunities that I knew it always had. It's a wonderful brand. It's got a great culture. It's got a heritage, second I think to no other business. Independence that we have, for now, a 127 years mean something post the GFC. So, you've got to believe in it. You've got to have the passion and energy every morning to think about our clients and our staff and how we're going to care for each other. It's a really lovely place to work. It's a challenging environment for everybody and we think we've got a lot more to do.
St Anne: Geoff, thanks so much for your time today.
Lloyd: Great, well, thank you.
/video/transcript/2390 mailto: ?subject=Stellar returns for the long term &body=http://www.morningstar.com.au/video/story/2390 Keeping faith in QBE Insurance
28/02/2014 Morningstar's Peter Warnes takes a look at the latest earnings results from QBE, Woolworths and Westfield Group and gives investors an idea of what to expect from these companies down the track. Keeping faith in QBE Insurance Nicholas Grove 28/02/2014 http://video.morningstar.com/aus/video/140228_qbe_audio.mp4
Nicholas Grove: I'm Nick Grove for Morningstar.com.au and I am joined again this week by Morningstar head of equities research Peter Warnes, who is here to discuss the latest results from earnings season which draws to a close this week.
Peter thanks very much for your time today.
Peter Warnes: Thanks Nick, good to be back.
Grove: First of all Peter, let's discuss QBE. They reported a $254-million loss this week after some previously flagged write downs in the US business, but putting 2013 to the side, should investors be patient and just keep faith in QBE's management?
Warnes: Nick, we think so. 2012 and 2013 really have been disappointing years for QBE. After a period of quite strong growth post-911 really and so we go back to 9/11 - the last time they reported a loss. Mind you, this year the loss was due to nearly $1 billion of non-cash write-offs, impairments and intangible write-downs on the US operations. But we should focus on the $761 million that they actually earned and that's the underlying cash profit, despite a lot of problems in the US as you previously mentioned.
Now, those problems hopefully are being rectified and behind us. So yes, we believe they will progress from here and 2014 will be a much, much better year.
Just looking back at 2013, though, the company still made an underwriting profit, despite all the problems in the US and despite the US operations having a $482-million underwriting loss. That tells you a lot about the other parts of the organization that were able to overcome that and still end up in the black from an underwriting point of view.
So the combined operating ratio, nearly 98 per cent, they expect that to fall to 93 per cent in 2014, and importantly, the insurance margin, which was down at 5.5 per cent for 2013, is expected to be north of 10 per cent. We are saying 10 per cent and we're comfortable with that number.
That will drive a very, very significant turnaround in the bottom line and we are looking for somewhere north of A$1.3 billion for 2014 and I think you will see the market now is starting to appreciate that, albeit the management has to make sure that they do hit these targets in 2014 because there is a lot of disappointment there and they have got to regain investor and market confidence.
So yes, we are still positive on QBE and fingers crossed that they will be able to get on with the job.
Grove: Peter moving on to the property sector, Westfield booked a result this week that met expectations and met guidance. Is its moat still intact and do you remain bullish on its prospects?
Warnes: Nick, Westfield is obviously a moving feast at the moment. This split, if you like, of assets. The Westfield we're talking about is WDC, which will be, if you like, the owner of all offshore operations, excluding New Zealand. In other words, North America, Europe and anything they do in South America and Brazil. So yes, we are positive on it. We're positive on the moat, the narrow moat that it has. They just are past masters and the best at building iconic shopping centres in high wealth or areas that high net worth people gravitate to.
And so, they've got a $9 billion pipeline of development. Look what they've done in the UK and London with those two fantastic shopping centres there. They're building another one in Los Angeles in the kind of top-shelf area. The World Trade Center, Milan - it just smacks of the luxury items, and they will get high rents and they will get high occupancy because they will attract the best retailers out there. And so, the is moat intact, we're positive on the outlook, and more importantly, if the Australian dollar is or continues to be under some pressures, then this stock gives you some protection with the rising offshore currencies.
Grove: Finally Peter, what would you think of Woolies numbers that were out this morning?
Warnes: Yes. Hot of the press, Nick. Not too bad. Albeit, I don't think the market was all that overwhelmed by them. Look, a 6 per cent increase in underlying net profit from continuing operations, because as you are aware Dick Smith is no longer with them. It wasn't a bad result overall. But, having said that, there are just some niggling things in there that might disturb people, one being Masters and this push into home improvement.
There is no doubt that the expansion is on track, but the performance isn't and it's dragging the chain. Having said that, Lowe's, their partner in it, has pushed out the date at which the put option can be triggered. So they can hang around for a little bit longer.
The other item there that was a little bit disappointing was BIG W, albeit these are only small parts of the business. Its margin at 4.9 per cent compared to Kmart at 11 per cent - they've got some work to do there. But having said that, this engine room of Australian food and liquor is unbelievable. I mean the EBIT margin at 7.88 per cent compares to Coles at 5.1 per cent. Looking back at Woolworths, people said these margin increases were going to stop two or three years ago. They have moved from 6.7 per cent two years ago to 7.9 per cent. Sales in 2009 were $33 billion - they're now $42 billion and the margin on that is fantastic.
So, look there's a couple of small things there that might disturb, but overall this engine room is firing and firing up all cylinders, and so we're still positive on Woolworths.
Grove: Peter thanks very much for you time today.
Warnes: It's a pleasure, Nick./video/transcript/2389 mailto: ?subject=Keeping faith in QBE Insurance&body=http://www.morningstar.com.au/video/story/2389 Dividend upside for Rio Tinto
14/02/2014 Morningstar's Peter Warnes takes a look at the latest earnings results from ANZ, CBA, Telstra and Rio Tinto and gives investors an idea of what to expect from these companies going forward. Dividend upside for Rio Tinto Nicholas Grove 14/02/2014 http://video.morningstar.com/aus/video/140214_dividends_audio.mp4
Nicholas Grove: I'm Nick Grove for Morningstar.com.au and today I'm joined by Morningstar head of equities research Peter Warnes, who joins me to discuss the latest results from the current half-year earnings season, which got well and truly under way this week.
Peter, welcome
Peter Warnes: Nick, lovely to be back.
Grove: First of all, Peter, let's talk about the banks. We saw ANZ give a first-quarter update and we saw CBA give its half-year results. Were there any surprises there or is it just the case of bigger and better profits as usual?
Warnes: Nick, bigger and better profits as usual, almost post-2010 the Australian banks have been on a roll despite the fact that credit growth has been subdued. They have continued to surprise all the skeptics and the hedge fund operators, who I'm sure are having headaches and sleepless nights. But there were a couple of surprises and both quite positive.
Lower bad debts continue to impact the bottom line positively. We thought that we would start to see a slowing in that rate of improvement in 2013, but it has trickled over into 2014 and that was a positive in terms of the impact on the bottom line.
Elsewhere, what's happening in the cost-to-income ratio is very, very important. These banks have both invested significantly in their IT platforms, and I think now you're starting to see the benefits of that despite the fact that credit growth and volume growth is still quite subdued. But you are starting to see the benefits of IT in productivity and efficiency and that's driving down that cost-to-income ratio.
So the positives and the surprises were both, as I said, lower bad debts continuing to filter through, asset quality still improving despite macro headwinds, higher unemployment, et cetera. But the lower interest rates are helping in that space. So, look - lovely set of numbers from both the banks. Commonwealth - rewarding the shareholders with a 12% increase in dividend. The self-managed super funds and the retail investors, those savvy investors, are just lapping it up, and I think there is more to come. We don't see any deterioration or ominous signs on the horizon as you get to derail our view of four major banks.
Grove: Peter, Telstra reported its earnings this week, and you've said recently that you think the company is in a very good position at the moment given the proliferation of smartphones and tablets and so on. Is Telstra still delivering and giving income investors what they need and do you expect it to continue to do so?
Warnes: Nick, Telstra did deliver again on line with guidance, on line with expectations, an increase in dividend albeit a marginal one, but it's a sign of better things to come. In the dominant space of mobiles, they continue to strengthen - another 750,000 odd mobiles in service for the six months - taking it to 15.8 million and 4.1 million of those on to their 4G network already. That is nearly over 50 per cent market share. Australia's penetration rate of mobiles has been quite phenomenal. There are 23 million people in Australia and there are 31 million mobiles out there, a penetration rate of 134 per cent - I shake my head. But that's driving Telstra at the moment and will continue to do so for some time to come. The superiority of their network is their strength and is their moat.
NAS - Network Applications and Services - also a very, very strong performer. Its revenue is strong at 29 per cent. The EBIT was a less growth in that but there was a big investment in that big contract for the defense department, but it's starting to gather some momentum as well. And we believe that those two will be the forerunners and the strength of Telstra going forward.
Look, the free cash flow generation still very, very strong. We can expect money coming in from those two divestments that they made in late 2013 and more capital management is on the table. We would expect probably at least A$0.145 in the second half and maybe A$0.15, but yes Telstra is delivering for income investors. We think the outlook is solid and the demand for data or the mobility or portability of data and their position in the space with so many mobiles in service is a great platform for them going forward.
Grove: Finally, Peter, what did you think of Rio Tinto's numbers last night?
Warnes: Nick, a very strong set of numbers and above expectations. This iron-ore price is still elevated and above where the market thought it may be, and that has been driving the top line, and of course, obviously margins are still very, very strong. But Nick, the critical point about this result was just how much costs have come out of Rio. Sam Walsh has done a terrific job there in cost-out. And you can look at the big mining companies around the world. They are now starting to come out of or in the early stages of coming out of a very, very significant austerity program. And that is good news for shareholders because that significant cost-out plus a very, very more considered approach to capital expenditure means free cash flow is burgeoning and that is a good news for shareholders. You saw the dividend end up 15 per cent, but the payout ratio is still only 35 per cent. I think there is some more upside there given this austerity program hasn't finished yet.
And so, both Rio and BHP look to me like being very, very solid dividend-payers going forward because of this cost-out. It might be different if the iron-ore price wants to tank, but I don't think that's going to happen in the short term. So, over the next year and a half, two years, I think shareholders are going to be banking some very, very healthy dividends.
Grove: Peter thanks very much for your time today.
Warnes: It's a pleasure, Nick./video/transcript/2388 mailto: ?subject=Dividend upside for Rio Tinto&body=http://www.morningstar.com.au/video/story/2388 3 key legislative changes for SMSF trustees
07/02/2014 Trustees need to grapple with a number of legislative changes made by the ATO. 3 key legislative changes for SMSF trustees Christine St Anne 07/02/2014 http://video.morningstar.com/aus/video/140203_spaa_audio.mp4
Christine St Anne: The SMSF Professionals' Association of Australia or SPAA will be holding its annual conference in February. Today, I'm joined by Graeme Colley to talk to us about some of the key issues on the association's agenda.
Graeme Colley: The rules which affect the Centrelink benefit rules and what that will mean going forward is that there will be a deemed demand just like ordinary savings or other investments that will be included in a person's income for assets and income tax purposes. So it's a big change from what it is at the moment.
So, from 1 July 2015 what we will see is that we won't be able to use the deductible amount as we can at the moment for new pensions from that time. So, I think the best lesson is to get into those types of pensions if you got a client in those circumstances prior to 1 July 2015 because there is certainly greater benefits coming out of that.
Well, I think in order to think about dividend washing and share of asset washing because in that ruling, the draft ruling that was recently brought out that's 2014/D1, it relates to a self-managed superannuation fund with purchased and sold shares within the one sort of very close transaction. And it's whether Part IVA will apply to that. And that's tax avoidance rules and so they're relatively complex and they have got an example in that draft ruling as to how that works.
I think they're much better. They're much equitable in the way in which they'll work, far better than the SIS legislation at the moment. I think we'll see the ATO less reluctant to impose penalty. So we'll see more penalties being around, therefore, trustees – it really muck things up. And I think we applaud those from SPAA's point of view. We think they're fairer and the way in which they'll be applied I am sure will be appropriate, in these circumstances, rather than the difficulties that the ATO has got at the moment.
Well, we've just about finished our draft of that and that should be to the government very soon. Now, my concerns are the e-commerce standards.
We want to see some things coming there about the roll-over benefits between superannuation funds and the proof of identity. We want to see the 10 per cent rule changed in some ways with concessional contributions, mainly because we think that's too complex and there's a bit of red tape around that. They're the main issues that we've got. There is also some administrative matters that we've got in a pre-budget submission that we'd like to see the government bring through.
03/02/2014 Morningstar's Tom Whitelaw gives us an insight into where managers are seeing value based on the latest Australian Small Companies Sector report. Finding value in small companies Christine St Anne 03/02/2014 http://video.morningstar.com/aus/video/131217_smallcaps_audio.mp4
Christine St Anne: Today, I'm joined by Morningstar's Tom Whitelaw to give us an insight into the latest report on the Australian Small Companies Sector Wrap-Up. Tom, nice to see you again.
Tom Whitelaw: Nice to see you, Christine.
St Anne: Firstly, Tom, the report looked at dedicated fund managers in the small company space. So how many funds were surveyed?
Whitelaw: Sure. So the universe of managers within the small caps space is about 135. We covered 35 of those, which doesn't sound that many, but it's about 85 per cent by assets under management.
St Anne: What value, Tom, can dedicated small cap managers bring for investors?
Whitelaw: Yes. So most investors are probably familiar with the large cap names, say, BHPs, Rios, the banks and Telstra and Wesfarmers, those kinds of stocks. But when it gets lower down the cap ladder, a lot of these stocks are much less researched. So it's much more difficult to find information on them. As if per the coverage and this is where the small cap managers really have that advantage.
So they are building diversified portfolios of a number of names, which again helps smooth the risk and they're also doing a lot of site visits. So they're going out, meeting management, really getting to know the ins and the outs of the company. So, hopefully, they can foresee any problems that are arising in the future, and you also find at the lower end of the market that fund managers will follow successful smaller cap management around, so if they've seen them do a job on one company, which works out well then they might move and follow them on to the next company which is very hard for a retail or an individual investor to kind of get that kind of access to those people.
St Anne: The report also looked at the shift occurring in the small cap sector, most notably the resources sector. Tom, can you tell us a little bit about that and what challenges that brings to small cap managers?
Whitelaw: So what we've seen over the last few years is that small cap resources has always been a major part of the market. So a couple of years ago, 40 per cent – over 40 per cent were small cap resources. Over last two years, those names have underperformed significantly, and there is actually more small cap resources in the small odds now, so it's come from 71 to 73 names. But they are actually only about 20 per cent. So it's really, really half from that point. Those stocks were always – well, managers we spoke to always felt it was easy to beat the benchmark because these stocks were – some of them are easy avoids.
There were businesses that were profitable. There were clearly businesses that these guys wouldn't own. These are now dropped off, so there are now much lower weight in the index. So you'd expect the index to become a little bit more tricky to beat, but would also expect to see some consolidation. So, we'd expect some bad businesses to go out of business or to be swallowed by some of the greater franchises, which mainly brings more of these small cap resources, which have now been out of favor for quite a few months if not years, back into favor. We may see more managers adding those into the portfolios now, getting a bit more exposure there.
St Anne: Tom, are these fund managers expensive? Can you tell us a little bit about the fees?
Whitelaw: Yes. I mean the fees, is important consideration and it kind of links to the last point. So the Small Ordinaries benchmark has always been a fairly easy benchmark for managers to be. So if you look on our database of 35 managers I talked about that we cover, over the last one, three, five and 10 years, every single manager we cover has managed to beat that benchmark, which is, yeah, it's unprecedented across coverage. And because of that managers with performance fees have been able to take fairly large fees from beating an index, which has being a bit of a gimmy. So, it's really important when investors look at these strategies to consider a few key points around the fee structure.
So, first of all, has it got a performance fees? If doesn't, if it's just a base fee then that's great. You know there's not many additional charges. There is a performance fee, make sure that the fee – the base fee that you're getting charged is reduced because you're probably going to be paying some more money on top. Make sure it's linked to an effective benchmark given how the strategy is going to be run.
So last year, for example, a couple of managers took high-single-digit percentage fees, a 7 per cent, 8 per cent fee, one manager actually took over 17% in ICR. And that's because the small resources underperformed and these managers didn't have exposure there, that benchmark was linked to that. So, yes, so make sure you've got a decent base fee, make sure there is a high watermark there, make sure that the benchmark is linked correct, make sure there is a hurdle on the fee structure as well. It just gives you that extra peace of mind that there's not going to be a big surprise at the end of the year when the fee comes straight.
St Anne: Finally, Tom, what sort of role do these fund managers play in a portfolio?
Whitelaw: So, they are really adding that extra bit of spice to a portfolio, so that they are going to be high risk, there is going to be more volatility there, that's the nature of the small cap investing. So there shouldn't be a bit slice. But if you just put them in as a small slice of the portfolio that can really add some diversification to the larger names you've got and also provide a nice performance kick in good times. But remember that they also like to underperform a little bit more in the down time, so just be mindful of that, have a long term time horizon when you're buying these things.
St Anne: Tom, thanks again for your insight.
Whitelaw: Thanks for having me.
/video/transcript/2385 mailto: ?subject=Finding value in small companies&body=http://www.morningstar.com.au/video/story/2385 Picking the right stocks
30/01/2014 NovaPort Capital's Sinclair Currie offers investors some insights into his team's stock-picking process. Picking the right stocks Nicholas Grove 30/01/2014 http://video.morningstar.com/aus/video/140129_small_audio.mp4
Nicholas Grove: I'm Nick Grove for Morningstar.com.au, and I'm joined today by Sinclair Currie, the principal and co-portfolio Manager of the NovaPort Smaller Companies Fund, and he joins me today to share some insights into his team's stock-picking process.
Sinclair welcome.
Sinclair Currie: Hi, thanks.
Grove: First of all, Sinclair, your fund has an actively managed, index-unaware process. Why is it that you believe the index is best put to the side?
Currie: When you're talking about small companies, essentially the benchmark is a truncation of the ASX 300. So, you take out the ASX 100 and what's left equals the Small Ordinaries benchmark.
This is a portfolio, which isn't constructed in terms of what offers good value or what offers good upside to investors. It's just simply companies, which offer size and liquidity, which meets the benchmark's criteria. So from a first point we say what the fundamental role we have as portfolio managers is to construct a portfolio of companies, which offer upside, and we're looking for 50 per cent over three years. So, we think there is a fundamental mismatch between the two objectives, the benchmark portfolio and our portfolio.
More specifically, another issue we see around the benchmark is that it doesn't necessarily offer any consistency in terms of risk or in terms of the types of stocks. So, we see a lot of churn in the stocks in the benchmark as companies either get smaller or companies get larger. And we see the benchmark over time, its risk level varies as different bubbles might bubble up and percolate through the benchmark and not.
When we look at the benchmark, we target a 50 per cent return over three years. Only 20 per cent of the stocks in the universe meet that target rate of return, whereas 40 per cent actually lost money. That salient figure there tells you that if you spend too much time looking at the benchmark, there is twice as much chance that each stock in the benchmark is going to lose money as it is going to make your target. So we prefer focus on looking at the fundamentals, just construct that portfolio rather than starting with the benchmark.
Grove: Your strategy looks to identify quality companies in the small-cap space. What is it that separates a quality company from the rest of the herd?
Currie: Quality is a subjective matter, but what we view as quality is companies where firstly there is sustainability around the business, where there is a predictability. Maybe the earnings might be cyclical and go up and down over time. But we feel confident that the customers of the business will go back and buy again, because there is a sustainability to the business. So that's paramount to our mind: Is this a business which has product or an offering, which is valued by its customers and has relevance into the foreseeable future?
The second element of quality is: How does that business actually translate its earnings into cash? And that's very important. There is such thing as profitless prosperity where businesses generate great profits, but they keep on having to invest and invest and invest and the actual cash returns to investors can be quite poor. Historically, you might have seen that in sectors which are very competitive, may be the auto sector for example. That's another element of quality.
A third point which we look for is management. And that's part of the quality equation we think is very crucial, particularly in small companies where there are businesses which are often quite new in their industries or in a very early stage of their development, where you really need that quality of management to oversee the business to ensure that it goes along the right path.
Grove: Sinclair, while being a proponent of bottom-up research when it comes to stock selection, you also look at top-down sector themes. Why is this important?
Currie: Top-down sector themes are important to us because very often we find there is the old adage of: The rising tide floats all boats. And where you see those opportunities, you'd be foolish not to capitalize on those as investors to give your clients a great return. So for the one point, there is that simple statement, which is very true and holds true in our case.
Secondly, we believe that the top-down provides a good point for which we can say, "Hey, is this a business which has the sustainability, which will stay in business?" You have to understand the industry it operates in. Interestingly though I think we differ a little bit, in that we believe that often the best way of finding out what's happening from a top-down perspective is starting with the bottom-up.
It sounds counterintuitive, but what we're really saying is the best way to find out what's going on is to speak to people who are actually involved in the industry - speak to the company, do the bottom-up research - and from that you will get a good idea of the top-down rather than sitting in an ivory tower in the CBD looking through reams of data. We find the field work is important and crucial in the top-down.
Grove: Finally, Sinclair, looking to the long term, where do you think some of the golden growth opportunities can be found in the small-cap space?
Currie: I think, in golden growth opportunities what we are looking for are industries, businesses where they have got a product which is growing in acceptance and the market will use more, so there could be demographic trends which drive that. Healthcare has always been a very strong market because health is something very dear to us all and we are all happy as we grow wealthier to spend more on living longer and better.
So, healthcare is one obvious segment there, and we've had exposures to company such as Sirtex, Fisher & Paykel Healthcare, which are involved in that sector because we don't believe there is a lot of push back from consumers and customers finding ways to expand their health.
Other sectors of the market where we see good growth would be in the financial services sector as the population is not just growing wealthier, but being given more freedom or being handed back the responsibility for their future because they're living longer and their governments are keen for people to actually make these decisions themselves in terms of how they provide for their retirement. There will be more need for those services. And that's something that's been in place for a while now, it's nothing new, but still is relevant today as it was a while ago.
So the sorts of stocks we look at, the companies where we can see those sorts of demographic trends or industry trends or just general growth in a new technology. I mentioned Sirtex Healthcare, I mentioned Fisher & Paykel Healthcare. I'd also look to companies such as SFG Group (formerly Snowball Group), which is a great financial services business with a strong management team offering a really relevant product in today's environment of retirees and people leading into retirement.
Grove: Sinclair thanks very much for your time today.
Currie: Thanks Nick. Thanks for your time./video/transcript/2384 mailto: ?subject=Picking the right stocks&body=http://www.morningstar.com.au/video/story/2384 5 new year resolutions
23/01/2014 Westpac's David Simon outlines five key new year resolutions that will maximise portfolio performance. 5 new year resolutions Christine St Anne 23/01/2014 http://video.morningstar.com/aus/video/140116_newyear_audio.mp4
Christine St Anne: Happy New Year, everyone. Today Westpac's David Simon joins again to talk to us about five key new year resolutions for investors.
David Simon: Tweaking your portfolio is an absolute classic. I mean, markets will move around regardless of economic conditions and as markets move around, it's really, really important to have a long-term strategic asset allocation strategy. So that means rebalancing on a regular basis and certainly not being a spectator.
The major asset classes of Australian shares and international shares and property indeed as well as other alternative asset classes like fixed income and currency are very, very fluid assets. They always move and having a very strong discipline strategic asset allocation is very, very important when you show the long-term plan stays the course.
Tax efficiency is certainly that people need to be aware of all the time, and there are certain things that people should be very cognizant of throughout the period. The first one is really knowing your marginal tax rate. Believe it or not, a lot of people actually don't know their own marginal tax rate.
Notably, there has been quite a few changes out of recent years on the tax rates, but people need to understand what the marginal tax rate is.
Other aspects around taxes is ensuring that people understand the right tax structures or the tax structures that are available. People can invest in a myriad of different options, such as a trust which gives control and discretion on how income and potentially capital was displaced. You can also look at other entities, such as superannuation, which is really, really, really efficient. Income tax is taxed at a maximum rate of only $0.15 in a A$1 and capital gains tax can be managed at a maximum rate of only 10 per cent. And indeed if you are in pension phase which for some people that's only from the age of 55 at the moment, you can actually be in a tax-free environment much like a non-for-profit where there is no income tax or capital gains tax whatsoever.
Other aspects around tax is understanding and managing gains and losses. People can be carrying losses forwards, so they can offset gains in the future indefinitely if they are carrying capital losses. And other aspects around capital gains is if an individual owns an asset for greater than 12 months, they get a discount of 50 per cent on their capital gains tax. So, it's really important that that people are aware of these tax situations.
The other aspect is all assets that generate income is largely taxable, but for some assets there are concessions such as Australian shares, franking credits can make the assessable income concessionally assessed, and indeed with property, the depreciation on property can also ensure that the tax assessment is more concessional than other traditional income such as interest from a term deposit.
According to ASIC, over half of the people that pass away, pass away without a will. So, that means that the law determines where assets are placed, and that could actually include relatives where you know the deceased effectively resents, so really important that people have an appropriate will.
But it doesn't just stop at the will when you're referring to things like estate planning. It can be a lot more complex and a lot more structured incorporating different techniques such as having a Testamentary Trust, Power of Guardianship, and also a Power of Attorney shows that not just the estate is managed appropriately, not just when one passes away, but also somebody is incapable or unable to make a decision while still being alive is important part of the overall estate planning.
Insurance is only necessary for people that don't have the provision in place or have accumulated assets sufficiently to ensure a replacement income or replacement of capital in the event they're not around. So, for those people – and that are traditionally more in the accumulation phase, for those people then insurances can be a very important part of their contingency planning. And there are many different ranges of insurance that people can look into. Certainly there is the staple, such as the lump sum insurance in the event of death, and that's particularly important for people that have large debt or maybe single income households where if the income earner is no longer around, they're not able to repay the mortgage, let alone the (lots of) expenses of the family. So, that's particularly important.
Other aspects such as disability and critical illness or trauma insurance is also important because that will pay a lump sum in the event of a critical injury or illness allowing the insured person to recuperate, but ensure there is no financial implication whilst they are out of action.
Other aspects such income protection is also critical for people that are completely relying on their own ability to exert labor in order to generate income. So, it's a tax effective product as it is largely 100 per cent tax deductible, but effectively replaces one's income in the event they are unable to work due to illness or injury.
There is no such things as a plan set in stone. I mean, as we all know our lives change. So, personal circumstances change in a very, very regular basis. On top of that, you've got financial markets that are always moving around. The legislation continues to change as well as the economic conditions, both domestically and globally. We will always evolve and will always move around.
So, it's absolutely critical that people are making sure that their strategies continue to be looked at, whether it's a business plan or personal plan or financial plan, they are continually reviewed to ensure they stay on track. That's where it's good to have quality advice, whether it's a legal advisor, whether that's financial planner, whether it's an accountant, really good quality professional advice will ensure that there is that underline discipline, ensuring that people stay on track regardless of how things move around.
21/01/2014 Property expert Margaret Lomas outlines effective strategies for maximising a property portfolio and managing these assets in retirement. Getting value from your property portfolio Christine St Anne 21/01/2014 http://video.morningstar.com/aus/video/131217_property_audio.mp4
Christine St Anne: It's my greatest pleasure to introduce property expert Margaret Lomas to talk to us about how to effectively manage a property portfolio. Margaret, welcome. Margaret Lomas: Thank you.
St Anne: Margaret, firstly, how many properties should an investor hold in a portfolio?
Lomas: It's a really good question and very often people either over think it or under think it. So you get people who might buy one or two and think that they are set for their retirement, which of course they're not. But then you get other people and it's probably perpetuated by the fact that people write books about hundreds of properties in portfolios, who think you just have to keep going and going. I think it depends on, first of all, how much time you've got until retirement. But if you're starting early enough, and early enough would be somewhere around 40 or maybe a little early up, then if you have 15 years available to you, 10 properties will create for you pretty good return income and be enough to also then grow, so that you've got a good asset base behind you.
St Anne: Margaret, of those 10 properties, what about an underperforming property? Your latest book did mention a lemon. So can you explain that?
Lomas: The old lemon. Look, if you buy enough properties, you're going to get a lemon. There is no two ways about it. One of the things that often holds people back from even buying their first property is this fear that it will be a lemon and very often people are looking for that perfect property. So for every day they are waiting to find the perfect property is another day that that fair to middling property could have been sitting in their portfolio and probably performing okay.
But if you get to the point where you do buy lemon and it could be your first or your tenth or your fifth property, then you got to have a look at that property and work out the extent of its poor performance. Is it really a real lemon? Is it doing things like holding you back from buying more property, because it's taking up spacing your equity position? Is it costing you a lot of money in cash flow? So you don't have the money that you need to continue to pour into debt repayment, because debt repayment is very important to create additional equity.
Is it the kind of property that maybe fails to get tenants? Is it the kind of property that's situated in an area where you are continuously doing repair work, because you tenants are not caring for the property? Is it bad enough to get rid of it? If it is, then you have to sell it. Very often people might not want to sell, they are holding and hoping that it's going to improve or to sell it they might take a short-term loss. But you've really got to be able to project that forward and very often that short-term loss is far better than the overall loss that it could create staining that portfolio too long.
St Anne: Margaret, a lot of the investor puts together their portfolio of properties. What about in retirement? How do they sell down those assets? In other words, what's an effective exit strategy?
Lomas: Whenever people start their property portfolios, they always believe that they know exactly how they are going to finish off that strategy. I think it's more important that you don't have firm plans around that until you get a little closer. That for many reasons so much can change – capital gains, tax regimes change. You don't know exactly what that portfolio is going to be worth. You don't know what your personal position is going to be in terms of whether or not you're going to be getting any government assistance, whether you are going to be self-funded?
However, having said that, in the main, most people think that when they get their portfolio of 10 properties, they will get to retirement, sell half of them, payoff whatever debt is there and that's based on the presumption that they all would have doubled in value by then and then leave on the remaining five. But it's interesting that once you start building that portfolio, you begin to realize that perhaps you don't need to do that when you get there. When you get to retirement, your property portfolio is going to actually be worth the smallest amount that it's going to be worth from then on, presuming that property in the main will grow, providing you bought some good properties into that portfolio.
You could hang on to that and its' worth at 70 is going to be more than its worth at 60. This all depends, of course, on what kind of cash flow you're getting out of it. But a property of 10 portfolio – a portfolio of 10 properties should be giving you a reasonable income of retirement presuming that you have no personal debt left. There is no reason why you can't sit on that and continue to borrow and continue to add to it, if you like, knowing that the income on it will grow as you get further into retirement.
St Anne: Finally, Margaret, what about capital gains? It's an issue that many people still grapple with.
Lomas: Unrealized capital gain is worth more to you than realized gain, which is another reason why I am not necessarily in favor of the sell-down strategy once you hit retirement. What you have as an asset is worth more to you than it would in cash because once you liquidate, you are going to lose some of it to capital gains tax.
The capital gains tax isn't always quite as big as people think it's going to be. Let's remember that there is 50 per cent discount. So, once you get to retirement and you do sell a property, you will charge capital gains tax on only half of the gain and that's only your marginal rate of tax. So, whatever you are earning at that time determines the tax rate on that gain. So in reality most people are going to end up with something like 20 per cent or so capital gains tax.
But having said that, it's better not to incur it. So if the property portfolio is already giving you a fairly good cash flow, then there is no reason to liquidate. If you do liquidate though, you have to understand that there will be capital gains tax and there are some strategies around that too. So, just selling them one at a time in different years, so that they are nowhere being sold together and quite often you can take advantage of those lower tax thresholds every year if you do need to sell down that portfolio.
St Anne: Margaret, thanks so much for your insights today.
Lomas: You are more than welcome.
/video/transcript/2381 mailto: ?subject=Getting value from your property portfolio&body=http://www.morningstar.com.au/video/story/2381 Investment prospects in 2014
16/01/2013 Ibbotson Associates' Brad Bugg outlines what investors should expect in 2014 and which markets he thinks present the best opportunities. Investment prospects in 2014 Christine St Anne 16/01/2013 http://video.morningstar.com/aus/video/131218_outlook_audio.mp4
Christine St Anne: It's a brand new year and today I'm joined by Ibbotson's, Brad Bugg to tell us about the investment outlook for 2014. Brad, Happy New Year.
Brad Bugg: Nice to see you.
St Anne: Brad, we've certainly had a period of double-digit returns in Australian equities. How do you see that play out in 2014?
Bugg: It certainly has been a strong year for not just Australian equities, but all equity markets in 2013. We're expecting a slightly different picture in 2014. I think specifically to Australia we are looking for the economy to continue to see sort of downward pressure in its growth profile.
Recent comments from the new treasurer, Joe Hockey sort of suggests that it's going to be a much more challenged environment. It's going to see sort of tax receipts under pressure and that's going to have an impact on growth. So I think that remain a much more difficult environment for Corporate Australia.
Also, we are going to start to see central banks around the world to start to reduce their support for markets. People have willingly bought into equity markets on the hope that sort of central banks and government would effectively backstop markets. But we see that changing over the course of 2014. It's going to see investors start to have to focus on the actual fundamentals, which we think have to start to get very stretched as markets have moved up through 2013.
St Anne: On that point of a challenging market, what part of the Australian economy do you like?
Bugg: Well, there is a not a lot that we like for 2014, given sort of how stretched fundamentals have become. Two of the sectors we particularly don't like is the banking sectors and the resources sector. First of all, in regards to the banking sector, we see sort of pressures on their loan provisions starting to rise again. Unemployment rates are one of the biggest drivers of those rises in provisioning. So, we would see sort of the unemployment rate starting to tick up through the weaker environment and that will obviously have an impact on bank profitability.
Second, in regards to the mining sector, we think that sort of given the pressures that we're seeing in terms of our mining investment and new projects, which are starting to be sort of wound back, that will have – start to put pressure on their margins, which we think will impact their profitability. Markets which we do think are more fairly valued are some of the sectors which have been relatively unloved through 2013 and to that we would highlight sort of the Australian rate sector. It's certainly unperformed over the course of this year, but we like it because there is distinct income stream, which is going to be coming through and that will help support their returns over the course of 2014.
St Anne: Brad, looking further afield, what sort of growth opportunities are there in the global economy?
Bugg: I think sort of what we'll see over the course of 2014 and it's the main reason why we're starting to see central banks thinking about wanting back support for markets, is that global growth will start to improve a little bit from what we've seen. That improvement is going to be most accentuated in the developed markets. And we've already started to see sort of the US and Europe start to deliver slightly better growth than what we've seen over the last 18 months.
On the other hand, emerging markets, which have been the main driver of global growth, we expect them to continue to sort of see their growth that was much lower than what we've seen in previous year. So we think that there are some opportunities in markets around the world, and I think those opportunities are probably going to be slightly better than what we will see here in Australia, because we're seeing that improving growth profile and that should better support sort of equity valuations in our view, markets we particularly like, Japan and Europe, because these are two markets which have been really beaten down over the last sort of three to five years and their fundamentals are much better priced and should deliver better return over the course of next year.
St Anne: Brad, finally, cash remained a dominant theme in 2013. Do you think that cash will still be king in the New Year and will investors still remain defensive?
Bugg: We think cash will still play a very important role in investor portfolios over the course of 2014. We've been holding very large cash positions in our own portfolios. And the reason for that is, because we think it plays a dual role. First of all, we think it's one of the few assets, which can preserve your capital with any certainty. In 2013, we saw many bond markets actually fall and deliver negative returns.
So, we think sort of that well set position might have improved a little bit, cash is the only asset we think that can preserve capital with any certainty. And given our uneasiness about valuations and markets may well fall from current levels, cash will play an important role.
Secondly, we think cash is important because it gives you that liquidity that when markets do fall, you are able to deploy quickly into the market and take advantage of some of those opportunities, but I think sort of there are strong returns which people have got from cash over the last couple of years are certainly going by the way side. We think the RBI will probably sort of take the cash right around the current level for some years to come.
So investors need to think about sort of where they'll get that additional return from. And I think given the rise we've seen in the Australian bonds, Australian bond yields over the last six months or so makes them a much more attractive bid than they have been for some years. So some people looking to add that defensive bent to their portfolio might like to consider Australian bonds as an alternative to cash.
St Anne: Brad, thanks so much for your insights.
Bugg: Not a problem.
09/01/2013 A new service being offered by the ASX aims to give investors better access to capital raisings such as IPOs. Getting a better deal on capital raisings Christine St Anne 09/01/2013 http://video.morningstar.com/aus/video/131213_bookbuild_audio.mp4
Christine St Anne: Our Head of Equities, Peter Warnes recently made some comments about retail investors getting unfair access to deals like IPOs. A new service from the ASX aims to change that. Today, I'm joined by Ben Bucknell to tell us a little bit more about the ASX On-Market BookBuilds. Ben, Happy New Year.
Ben Bucknell: Thanks. I can't believe it's 2014 already.
St Anne: Ben, can you tell us a little bit about the AXS On-Market BookBuilds and how it works?
Bucknell: Absolutely. Well, it really came out of the 2008-2009 years where there was a lot of deeply discounted offerings, where normal ordinary shareholders and companies were being dilutive. Companies clearly needed access to capital quickly, so they used the traditional placement method.
The problem with that method was that it didn't tap into every eligible investor in the market. So I took an idea to the ASX which said, why don't we take the traditional process, all the controls that you have around allocations and around pricing, but put it on the market.
So that every investor has the opportunity to bid for shares if they see value in them and also for companies, meaning that a company can access not just a really small pool of investors, but the entire market of investors. So ASX BookBuild is really a combination of the secondary market as we see it today and the traditional process of raising capital.
St Anne: So how can investors get access of some of these deals, such as IPOs?
Bucknell: Well, it's very simple. All they need to do is fill out a once-off application form with their broker. Once they have done that, it's just like buying shares in the secondary market. So you see a code, let's say, it was BHP doing a – as we were talking about before – doing a BookBuild to rise capital, that's a BHPXPB and they just bid in. But in order to bid in, they have got to fill out that once-off agreement with their broker.
St Anne: Ben, the traditional way for companies to raise capital was to go through their broker. So do you expect more companies to participate in this service?
Bucknell: Well, one point of clarification there. This always does involve a broker. So you still have a broker doing their traditional process of getting together demand from your institutional investors or from your existing shareholders. They bring that demand into the book and then they do the ASX BookBuild after they are comfortable with what their already offer is.
So for companies, it's a no-loss proposition. Basically, they can get access to the entire market of potential shareholders, potential investors, and they do that after they are already securing the knowledge that the capital is going to be raised. They can either do it simultaneously or they can do it consecutively. So for companies, it's a very simple proposition. Do you want to be able to access 30, 40, 50, 100 investors or do you want access to the entire market of investors?
I think what's really interesting and particularly with your clients, you've got 207,000 high net worth clients in Australia with investible assets of more than million dollars. You've got a $155 billion sitting in self-managed super in cash and short-term deposits alone. That's only a third of self-managed super pool by the way. So all that capital can come to bear and – on the market and be used for companies to grow, and at the moment the current prices doesn't let companies tap into those markets.
Of course, on top of that there is all the small institutional managers. So if they get a phone call at the moment, they might be saying, 'Oh, I don't necessarily get a phone call on the good ones, so am I going to take up in this one.' But under ASX BookBuild, every single investor gets to participate and gets to bid and be allocated in the process which is fair. It's transparent because everyone can see a live price and you know, just like you do in the secondary market, that if you bid at or above that price, you'll be dealt with securities in the same way that every other on-market bidder will be dealt.
St Anne: Finally, Ben, being a relatively new service, how has the market responded?
Bucknell: I think it's been fantastic. We launched on the 8th of October, only five days later we had our first transaction, WAM Capital. That was 70% oversubscribed and they upsized the offering from $15 million to $25 million. The next offering LNG, a resources company, that went out, raised $10 million using the facility and now there is lot of IPO where the front end of the process got the demand from ASX BookBuild and that's still open for investors to be able to bid into. That's a call company up in Queensland.
So I think from the companies perspective, there has been an extraordinarily strong response. We've seen around 200 listed companies, most of those are in the ASX 300. The response from them has been unanimously positive. We've seen a number of brokers who are now out in the market pitching this and saying this is a wider wining business. And of course, we've had a ton of brokers and their clients sign-up so that when a BookBuild comes along, they can bid in and be treated in the same way that a big institution might be.
So if you're a small investor out there and you haven't yet signed up for ASX BookBuild, then contact your broker, get that once-off application form and if you're eligible under the law to bid. And by that I mean, if it's a fully documented offer like an IPO, you can just bid in no matter who your broker is, if they are using ASX BookBuild.
If it's an undocumented offer, which is just of course available to sophisticated investors, and you make that category, well, you can bid into that as well and you just see the code just like you do in secondary market trading. So it's really simple. The key is just signing that once-off agreement with your broker and every broker in the market is entitled to bid into ASX BookBuild facility in the same way that they bid for shares in the ordinary trading of secondary market.
St Anne: Ben, thanks so much for your insights.
Bucknell: My pleasure. Thank you.
19/12/2013 Morningstar's head of equities research Peter Warnes provides an outlook on the key investment issues for 2014. Huntleys' Forecast 2014 Christine St Anne 19/12/2013 http://video.morningstar.com/aus/video/131213_forecast_audio.mp4
Christine St Anne: Huntleys' Your Money Weekly has released its forecast. To give you some idea about what investors can expect, I'm joined by Morningstar's Head of Equities Research, Peter Warnes. Peter, lovely to see you again.
Peter Warnes: Christine, as always, it's lovely to be here.
St Anne: Peter, firstly the US and tapering have been a big theme over the last few months. Can you explain what that actually means and what are the implications for financial markets?
Warnes: Sure, Christine. The taper and 2014 will be the year of the taper. It's specifically about, if you like withdrawing money from the system from QE3. QE3 was the biggest quantitative-easing the Fed has undertaken; $85 billion per month of asset purchases. They've been doing that since September 2012 and they have put over $1.3 trillion back into the economy or back into the liquidity system.
Now as the US economy improves, the taper will be withdrawn and the program will be downsized. And that's good news, because that's the signaling – the signal from the Fed is that the economy is improving. So that's positive for the long-term. In the short-term the markets may – there may be some reaction. Albeit that if you are going to withdraw mainly from a system, in other words, reduce the right at which you are purchasing assets, the suggestions are and it's already happening that bond yields will rise. And bond yields rising tend to be negative for equity markets.
I would argue that you are already seeing the bond yields move in anticipation of the tapering and therefore, I am not really too concerned about bond yields rising further and having a negative implication on the equity markets longer-term. Because equity markets in the past have performed when bond yields have been substantially higher than they are now. We – the 10-year rate in the U.S. prior to the GFC had a 5 in front of it. The current rate is 3.8. So there is still some room to move on the upside in terms of bond yields. But I don't think it necessarily means that the equity market falls apart and I'm certainly not expecting that all.
I'm expecting some kind of nervousness around it. But I believe that Janet Yellen, who as I doubt will handle this tapering very, very carefully and I think longer term that it signals better times for the US economy.
St Anne: Peter, closer to home, Australian investors continue to have a home bias. Would that have to change over the next six months?
Warnes: Christine, I mean all of that means is that, you are talking currency. With the taper, you would expect as I said bond yields to rise and it's signaling a better US economy, so you would expect that better US economy to be reflected in a better or higher U.S. dollar. The other side of the coin is, obviously a lower Australian dollar. Now how investors and subscribers don't know, deal with that.
Well, we can deal with it by going offshore and buying direct equities in the offshore market, which obviously has some risk because I am not saying, you necessarily note as much about those stocks as you would your domestic stock. Also there is going to be some currency risk, because the currencies will move around. But looking forward, the A$ to fall, so you should benefit from it.
So direct exposure you could go by foreign S&P 500 ETF; exchange traded fund. You could buy a Platinum management here, the asset management company or the Platinum portfolio, which is an offshore portfolio or you could see – have a look at some stocks that have got large US dollar revenues and earnings that are listed in Australia. And those would be the healthcare companies; CSL, Cochlear, ResMed. Companies like James Hardie, Brambles, Amcor and so those type of companies who have a large proportion of their earnings from offshore.
Woodside is in a very, very unique position I believe, because it gets its revenue in US dollars. It gets obviously, its profits in US dollars. It reports in US dollars. It pays dividends in US dollars and the majority, overwhelming majority of its cost base is in Australian dollars. So they get a double whammy. The costs are in Australian dollars, everything else is in U.S. dollars. So that's one to be – to look at.
St Anne: Peter, another big thing that played out throughout the year was income stocks and they continue to be attractive, but are quite expensive. Do you still see any opportunity?
Warnes: Christine, I do. Because we are not expecting the cash rates in Australia to rise, they may actually come back one more notch. But they are not going to rise in 2014. So for cash rates going to be as low as it is and your term deposit rates are going to be as low as they are, then investors have to move a little bit further out the risk curve and have exposure to sustainable income stocks. In other words, income stocks that have sustainable cash flow earnings and therefore dividends.
And we come back given the correction we're just having at the moment, which we anticipated, some of these income stocks have now come back into our green zone. So we're still very comfortable with the four banks. And even stocks like Woolworths that have now a yield, a 4 per cent yield before grossing, they are starting to be effective. So with this market coming back 7 per cent in the last 30 days, these income stocks are not as expensive as they were. And we're still quite positive. I think income still has to a focus in 2014, for self-funded retirees and our retail investors.
St Anne: Finally, Peter, what sectors will give opportunity to investors over the next six months?
Warnes: Well, over the next six months, look we – again we have get through these tapering – the early phases of the tapering. So there is going to be some nervousness around. There is going to be some volatility around. And that's why we've suggested that cash build up in portfolios for a little while. I would still think that financials are going to offer you some opportunity. I mean, again the banks.
Energy; we like Energy. We like Woodside. We like Woolworths in the retail space, nice defensive quality about it. We like Westfield – the big Westfield Development, WDC, as our – almost our number one pick in the REITs space. Now that it's going to be a straight overseas focused REIT, again, gives you the currency protection you might be looking for. So there is going to be some volatility, but they are stocks we still like. And I think at the right opportunity when these stocks are in the green zone, investors and subscribers should certainly look at them.
St Anne: Peter, thanks again for your insight, and have a lovely, safe Christmas.
Warnes: Well, thank you, Christine. And to all our subscribers, I wish them all the best for Christmas and a safe and prosperous New Year.
17/12/2013 A new government inquiry into financial services will be among the key issues trustees will have to grapple with in 2014. What can SMSF trustees expect in 2014? Christine St Anne 17/12/2013 http://video.morningstar.com/aus/video/131206_education_audio.mp4
Well, it's nearly the end of the year now, and today I'm joined by Peter Lee from Mind Wealth Management to talk about what SMSF trustees can expect for 2014. Peter, nice to see you again.
Peter Lee: Thank you. It's great to be here.
St Anne: Peter, the newly elected coalition government has already launched an enquiry into the financial services sector. What can SMSF trustees expect from this enquiry?
Lee: This enquiry will most likely look at the financial services sector and superannuation sector, with the aim of increasing efficiency and reducing the regulatory burdens, which I think, that will be actually a win-win for a lot of consumers out there.
Superannuation is now appropriately A$1.4 billion to A$1.5 billion of assets. It's one of the largest private savings pools in the world, and it's tipped to actually double in the next 10 to 15 years.
So, the government just wants to make sure that people setting up a self-managed super fund are finding there is an appropriate structure to hold their investments, are well educated in terms of their responsibilities and their legal obligations.
St Anne: There has also been a lot of concern about SMSFs and the property market. Would these also be part of the enquiry?
Lee: They're also a little bit concerned about the rise in investment properties within self-managed super funds, namely around borrowing to invest and maybe a bit of property speculation in that sector. They want to make sure that they are matching the long-term obligation s as trustees of the fund to their short-term needs of their members.
And to give you an example, with most investment properties, the returns are around 2 per cent to 3 per cent per annum after taking into account tax and running costs, whereas most people take out 5 per cent to 6 per cent of pension withdrawals per annum. So, we see a gap in terms of the investment strategies that some funds might hold if they're fully invested in investment property.
We advise all our clients to be well diversified in their approach to the investment strategy and make sure that they are matching the long-term obligations of the funds to the investment strategy that they implement.
St Anne: The government has also moved to abolish the tax on pensions over $100,000. Peter, can SMSF trustees expect more favorable measures?
Lee: Look in our view, the abolishment of that tax over $100,000 of superannuation earnings is a good move by the government. We do want to have a fairly stable legislative environment to encourage people to actually save for retirement.
In terms of further favorable measurements, I get the feeling that the government will probably leave the superannuation system as it is and wait for the results of their enquiry with any tangible benefits announcement probably being announced later in the term of the government.
St Anne: On that point of not to agree with the system, the government has also delayed the increase in the superannuation guarantee, therefore, would there be more of an emphasis on voluntary measures?
Lee: Look I think there would be some incentives to actually look here to the voluntary superannuation contribution caps. But we see there might be some competing interests in this. On one hand, they do have a current account deficit, which they need to balance. So, they're unlikely to increase the contribution caps too far in my view.
On the flip side, they do want to provide incentives for the people to be self-funded in a retirement, and we see the reason for this is that, with the aging population and a lot of baby boom is coming up to being eligible for the age pension, funding for this age pension will be a greater problem for governments going forward in the medium to longer-term.
So we expect that the governments will have to balance out their short-term needs to their longer-term obligations.
St Anne: Finally Peter, ASIC, the corporate watchdog is looking also closely at the SMSF sector, and in particular, educational standards. Is that something that trustee should need to look at in 2014?
Lee: Look, in my view, greater education standards for the trustees can only be a good thing. They will be more aware of their obligations as trustees and the legal obligations of running a self-managed super fund. But more importantly, I think, it will actually help the trustees make better investment decisions and better decisions overall in relation to their super funds.
St Anne: Peter, nice to see you again and have a great Christmas.
Lee: You too, Christine, Merry Christmas and a Happy New Year.
/video/transcript/2377 mailto: ?subject=What can SMSF trustees expect in 2014?&body=http://www.morningstar.com.au/video/story/2377